SEC committee to policymakers: Revise ESG rules or be left behind

The US risks falling further behind the UK and Europe unless rules governing reporting requirements for issuers around environmental, social and governance factors are updated.

That was the conclusion from the Securities and Exchange Commission’s investor advisory committee, which issued a recommendation that issuer ESG disclosures be enhanced. According to the committee, doing so would offer investors “material, comparable, consistent information they need to make investment and voting decisions”.

The committee’s recommendation to update issuer reporting requirements was accompanied by a list of suggested next steps, which included proposals for SEC staff to proactively engage with investors, issuers, and market participants to better understand what additional requirements could be useful.

“Trillions of investment, savings and retirement dollars are invested globally in businesses where material ESG information is relevant to investment and voting decisions,” the committee explained in a statement.

“Investment and voting based, in part, on ESG disclosure is front and centre in today’s global investment ecosystem. Major business risks, decisions and strategies stand upon ESG factors and investors are not being served or protected by the piecemeal, ad-hoc, inconsistent information currently in the mix,” the committee members concluded.

It comes as UK and European regulators have unveiled a host of initiatives to improve ESG reporting in response to investor demands. At the same time, fund managers have been increasing their involvement in the stewardship of investee companies.

Despite this, data from Minerva's sustainability research team show that US companies typically score very poorly across a number of key sustainability metrics when assessed against global peers.

According to Minerva research for the full year of 2018, there were no companies in the US with the highest A grade rating. Of 259 US-listed companies assessed, just 7.2% scored the second highest B grade rating. By comparison, 2% of companies in the European Union scored the top A grade, with a further 41.9% scoring a B grade rating.

The US also had a sizable percentage of companies with the lowest scores (ratings of E or F). The Minerva research shows that 0.7% of US businesses had the lowest possible rating, while a considerable 39.4% of US companies had the second lowest score.

When the scores for companies across the world were averaged, the US had the lowest average score in 2018. The average US corporate score was 35%, followed by Asia (39%), UK (42%), Australasia (45%) and the EU (59%).

An analysis of the individual grading scores puts only Asia with a higher percentage of companies scoring a Grade F, the lowest score. There was no trend between the score achieved and the industry sector of the company.

These disappointing scores come as three quarters of US companies produced a separate sustainability report in 2018. Minerva’s research also found that 57% of the US companies reviewed were not up to date with the financial year in question by the time of their AGM.

There were some beacons of hope, however. US companies Newmont Mining and Intel both achieved a B grade in their reporting. Several other companies also scored above average – Colgate Palmolive, Johnson & Johnson, 3M Company and Ford.

Investors and fund groups are increasingly looking more closely at sustainability data for clues about future corporate behaviours, after a series of research reports in recent years underscoring the power of ESG data in signalling company performance. 

For example, in 2018, Bank of America Merrill Lynch explained that research conducted by its equities team found that firms that outperform their peers on ESG were less likely to go bankrupt, less likely to see declines in earnings and have a stronger likelihood of becoming alpha generators.